Electricity bills soar as rate caps expire

By By Christina Gostomski

|Of The Morning Call|

Jul 30, 2006 | 12:00 AM

Every day, Joe Fretta fills the gleaming glass cases in his mom-and-pop Milford deli with homemade sausage, fresh cheeses and oversized dishes of eggplant parmigiana and pasta. Every day, he churns out platter after platter of Italian delicacies in the downstairs kitchen at Fretta's Italian Specialties, which he runs with his wife, Denise.

And every day he hopes for a miracle to end his financial woes.

Fretta, who's been featured in some of the country's most notable cooking magazines and whose dishes are renowned at at time when few people still make their own meats and cheeses, could lose everything: his home and his livelihood, a family business 100 years in the making.

The reason? He can't afford to pay his electricity.

Fretta lives and works in Milford, a Pike County village where electricity rates have risen by 67 percent -- 129 percent when you factor in the taxes.

"It's too much, too fast. If it wasn't for credit cards, I could close up," Fretta says as he looks around the place to which he devotes seven days a week. "This story with the electricity, it just doesn't stop and everybody is feeling the effects of it."

Since last fall, when the caps on rates expired for Pike County Light & Power Co.'s 4,500 customers, electric bills have skyrocketed in Milford and neighboring Milford Township. For the small tourist area on the northern edge of the Poconos near the New York and New Jersey borders, the higher power costs have had a ripple effect on the regional economy, cost of living and lifestyles.

But what's most frightening about the Pike County predicament, according to economists and utility experts, is that what happened in Milford -- one of the first areas of the state where rate caps have expired -- could occur over and over in towns and cities across Pennsylvania as caps expire over the next four years. Caps for PPL, for example, expire at the end of 2009, while those for Met-Ed cease at the end of 2010.

It's already happening in other states. In Maryland, residents powered by Baltimore Gas & Electric Co. expect a 72 percent increase in their bills. And in Delaware, some customers face a 59 percent rate hike.

In Milford, Fretta and a number of other business owners have made do by not paying their full electricity bills. Instead, they pay the electric company what they paid last year plus, as Fretta puts it, "a little extra because I know it costs more now."

But by doing that Fretta has run up an $8,000 debt to the power company since January, and now frets the bills will ruin his credit. But he doesn't know what else to do. "If I pay the full amount, by winter, they'll put me out of business," he said.

Pennsylvania once a model

This is not how deregulation was supposed to work.

Before deregulation began a decade ago, most utilities owned both the power plants that generate electricity and the power lines that distribute it. States regulated both the generation and distribution charges, requiring that those fees be tied to costs only. But proponents of deregulation argued that splitting generation from distribution would create business competition, lowering prices.

Many states began deregulating the power industry, encouraging utilities to sell their power plants to other companies. Those that did had to buy back electricity to distribute to their customers.

Electric rates were kept low during deregulation because most states, including Pennsylvania, set caps on how much companies could charge for generation. As wholesale electrical prices rose, the cost to consumers remained artificially low.

Utility companies were able to stay afloat because they signed long-term contracts in the mid-1990s with electric generation companies, locking in their charges until the rate caps expired.

Indeed, Pennsylvania was heralded in the late 1990s as a model of deregulation for other states to follow, and in 2001 it was ranked as the nation's leader in electricity deregulation in a national study conducted by the Center for the Advancement of Energy Markets.

As part of deregulation, Pennsylvanians were allowed to switch electric companies as they shopped for better rates, and many did so.

Consumer choice fizzled

Now, the Pennsylvania electric landscape is a much different story.

With rate caps expiring and the lower-cost contracts that electricity distribution companies signed with electricity generation companies ending, utilities are left to negotiate new contracts with suppliers.

Those new contracts are coming in at significantly higher prices for several reasons. First, the cost of natural gas -- one of the resources used to generate electricity -- has risen, driving up wholesale electricity prices. Second, the state no longer regulates the cost of electricity generation -- the largest portion of electric bills -- so companies don't have to base their charges solely on their costs.

And third, the anticipated electric competition never materialized, largely because alternative power suppliers couldn't compete under the low rate caps. Many of those consumers who switched power companies ended up back with the company they started with as new power suppliers bailed out. The result is that few Pennsylvanians still have a choice in picking an electric utility.

Jennifer Kocher, spokeswoman for the Pennsylvania Public Utility Commission, which oversees the state's energy industry, said electric customers need to adjust to the changing market.

"Global electricity prices are not immune to the volatility in the global energy markets," she said. "In 1996, gas was $1.13 a gallon, in June 2006, it was $2.91. The rate caps are sheltering consumers from some of that right now."

Caps lauded

John Hanger, president of Citizens for Pennsylvania's Future, which supports electric choice, said Pennsylvania consumers did well financially for the past decade thanks to the caps.

"Electricity has in fact become a bargain," he said. If electricity rates rise 35 percent now, he said, consumers will be paying about the same as they would have paid without the caps -- but they will have saved the money they didn't have to pay because of the caps over the past decade.

"Customers will have done very, very well because they have kept all that money," he said. A study by Citizens for Pennsylvania's Future shows that 1996 generation rates per kilowatt hour were 8.65 cents for PECO Energy and 6.26 cents for PPL. With inflation, those rates would have risen to 11.07 cents and 8.01 cents respectively, without the rate caps, he said.

Moreover, he said, rates may not be as high as some expect. Hanger points to Duquesne Light, another Pennsylvania company whose rate caps expired yet it reduced its prices. Its rates are 15 percent lower, according to some estimates, than they were in 1996.

Although Duquesne customers initially saw a decrease after caps expired, they have increased several times over the past few years, he said. Moreover, he said customers are getting the short end of the deal. They have spent the past decade paying stranded costs -- the potential losses to electric power utilities as their industry is deregulated -- to utility companies in exchange for promises of lower generation prices.

Under a deregulation agreement brokered by the state, in exchange for the promised electric competition, utilities were allowed to charge customers for stranded costs until rate caps expire.

"We paid those costs and were promised competition," Hughes said, adding he believes all Pennsylvania electric customers will now get "is a series of rate increases."

Looking to leave town

In Milford, residents say the end of caps has triggered electric sticker shock.

Renters have scuttled out of town and property owners have tried, mostly in vain, to get out, too. Betty Hague of Milford Township has watched residents put up For Sale signs, but has yet to see a "sold" sticker slapped across them.

"Anyone who knows what happened here won't buy here," she said.

Like Hague's neighbors, Fretta says he too has no choice but to stay and legally fight the electricity increase. He's spent tens of thousands of dollars on the house that holds his cooking equipment and deli on the first floor.

"I'm so buried in here, I can't move," said Fretta, who with his wife and teenage sons lives above his business. "I sunk myself in this place."

Ripple effect on other costs

It's not just the electricity prices that are overwhelming. It's the prices for everything else that have risen as a result of the electric costs, Milford residents say.

In the 45 years he's lived in Milford, Charles Sebring never saw his bills rise as quickly as they have this year. The electricity bill for his ranch home jumped from $180 to $300 a month, the 68-year-old retiree said.

He expects his local taxes and property taxes to increase, too, as schools and governments cover their own rising electricity bills. But unlike businesses that can try to recoup their costs by raising their rates, Sebring says that as a retiree living on a fixed income, he has nowhere to go for extra cash.

"I'm stuck," he said. "Everything's gone up. Everybody is passing it on to the bottom to the little guy. The little guy is paying all the bills."

Turning to the state for help

Sebring, like many Milford residents, would like to see the state come up with better energy sources. "I think they should find some better ways to generate electricity," he said.

In fact, state lawmakers, fearful of the political fallout their colleagues in the Maryland General Assembly faced after rates spiked south of the border, have shown increasing interest in alternative forms of energy. Gov. Ed Rendell, for example, has been promoting wind energy.

But those alternatives take years to develop, and buying back the generating plants and re-regulating the industry would be nearly impossible, industry experts say.

At today's prices, most states couldn't afford to buy the generating plants or build their own. And proposals to extend rate caps receive little enthusiasm because a similar plan in California five years ago during the state's electricity crisis backfired and bankrupted the state's largest utility.

Unfortunate timing

The PUC has yet to establish statewide regulations for companies nearing their cap expirations. Instead, it has been approving deregulation plans proposed by the utility companies on a case-by-case basis.

When Pike County Light & Power reached its cap expirations last fall, the state allowed the company to buy all the power it needed for the next 18 months at an auction. But the auction was held just after Hurricane Katrina, a time when gas and electricity prices were high. The result: Pike County Light & Power customers ended up with a 72 percent hike in their electricity bills.

Energy experts believe the escalation was a result of four factors: the date of the auction (after Hurricane Katrina), the fact the company bought all its power at once rather than over time (reducing the risk of inflated prices), Pike County Light & Power's small customer base (which made bidding unappealing to some generating companies), and Pike County Light & Power's participation in the New York power grid, which typically has higher prices than the PJM grid that serves the rest of the state as well as parts of six other East Coast and Midwestern states.

Michael Donovan, spokesman for Orange & Rockland, the parent company of Pike County Light & Power, says the company stands by the auction results. "It was an auction," he said. "That's the purest form of a market there is."

Rebid offered little help

Pike County customers were less than pleased.

In response, the PUC arranged for a second auction for a pool of disgruntled customers (all but 14 of Pike County Light & Power patrons) who wanted out of the original. It was held in April, on a day when fuel prices skyrocketed.

The lowest bid for generating electricity came from Direct Energy. Although lower than what Pike County Light & Power offered, it still was 67 percent higher than what residential customers paid before their caps expired.

"It didn't help us at all," Fretta said.

Milford residents have the option of opting out of both plans and holding a third auction. But so far, no one has stepped forward to organize the complex endeavor. Instead, residents are asking the PUC to force Pike County Light & Power to sell their distribution lines to another company and allow them to buy electricity from that company's generation provider. Their case will be heard before an administrative law judge in Scranton this week.

"If this doesn't work, I lose everything. I lose my family, my home, my business, my employees and this town loses this whole place," Fretta said, his voice rising with the frustration that runs like an undercurrent through town.

What to do?

Folks here are angry at the state for deregulating and then not preventing the price jump, at the electricity generating companies for making what they suspect are large profits and now, as the situation drags on and their debts grow, they're turning on one another. Everyone seems to have a different idea about how to best fight the power giants -- and little sympathy for those who don't agree.

"If you don't stick together, you're not going to get anything done," said Fretta, who wants his neighbors to join him in not paying the increased electricity bills. "Nobody is standing up for what they need."

As two visitors head out of his deli for the Milford Diner down the street, Fretta asks them to take the owner a message. "Tell him, "Don't pay the electricity. Don't pay the increase,"' Fretta said.

But the diner owners are paying the electric bills, mainly, they admit, out of fear they'll lose the business if they don't. Still, paying the bills comes at a price. They've already raised prices a few times, and now they cut back on other things -- turning off half the lights during the day and running just two air conditioners instead of three.

Lifestyle sacrifices

Clearly, lifestyles in Milford are changing.

Standing on the main street running through the borough on a 103-degree summer day, Hague fans herself slightly with her hand as her makeup melts into her face. She's anxious to get out of the sun and into her Milford Township townhome, but she knows the temperature won't be much better there.

For most of the summer, her air conditioner has been turned off.

"We're sweltering. We only turn it on when we have to," said Hague, whose electricity bill for the 2,200-square-foot home she shares with her husband jumped from $39 in January 2005 to $160 in January 2006 to $214 last month.

The Hagues don't open their drapes during the day, they don't turn their outside lights on at night and in the winter they bulk up on sweaters rather than turning their heat up. "We're doing everything we can," Hague said. "It's still bad."

PUC a 'paper tiger'

So far, the Hagues, who run a private investigation business, have staved off raising the rates they charge. But many in the borough haven't managed that feat.

At the Dimmick Inn and Steakhouse, a popular Milford restaurant that exudes the charm of a bygone age, owner Gerry Hansen says he's paying $1,000 or more for electricity each month.

"We have had to adjust prices and pass some things along to the consumer," he admits.

His clientele is changing its habits, too.

People still come out to eat, he said, but they come for dinner between 2 and 4 p.m., when they can still eat for lunch prices, and escape some of the hottest hours of the day inside their un-airconditioned homes.

"The utilities were a huge slap in the face," Hansen said. "The PUC is nothing more than a paper tiger."

Jersey plan an option

PUC members, who describe the Pike County situation as "ugly," don't want to see it replicated across the state.

They're considering options proposed by the utility industry, including allowing utilities to charge customers higher rates now, then using the money to lower future payments, or collecting more money from all patrons and using those funds to give discounts to low-income residents and seniors when the rates rise.

Additionally, PPL and PECO, whose rates expire in 2009 and 2010 respectively, have proposed following a deregulation model used in New Jersey: holding three auctions over a period of time and buying a portion of the power they need at each auction. The theory is that by spreading the power purchases out, they will run less risk of catastrophically high prices such as those following Hurricane Katrina.

But none of the plans are perfect. Charging customers more now and then using the money to lower future payments means that some customers might pay the higher rates now and move before they get to take advantage of the lower rates. Conversely, others may move into the coverage area later and get the advantage of the lower rates even though they didn't pay in.

Plans that provide additional aid to low-income residents and seniors do nothing to help the millions of Pennsylvanians in the working and middle classes who don't qualify for aid and will be pinched by the higher rates.

And while the proposal by PECO and PPL may reduce customers' risk of a 72 percent rate increase as Milford residents experienced, it doesn't address the problem of runaway power prices.

Back in Milford, any increase, no matter how gradual, that ultimately raises electricity rates by more than 65 percent is greeted with scorn. Fretta says he can't raise his prices that much.

"People will only pay so much for a sandwich," Fretta said. "After that, they'll stay home and eat Wonder bread and scrambled eggs."

RATES RISING

Rate caps set by a decade-old Pennsylvania law deregulating electrical utilities are expiring, causing monthly bills to climb. Here's when caps come off for customers of these companies in the region:

PPL Corp.: 2009*

Met-Ed: 2010*

PECO Energy: 2010*

*Caps expire on the final day of the year.

Source: Pennsylvania Public Utility Commission

SOFTENING THE BLOW

When electricity price caps end for most Pennsylvanians in 2009 and 2010, electricity rates could dramatically rise. Here are things consumers can do to help with electricity prices:

Conserve energy. The less electricity you use, the lower your bill will be. And the less demand there is for electricity as a whole, the lower the price. Among ways you can conserve electricity:

-- Keep the heat turned to low temperatures in the winter.

-- Avoid using air-conditioning in the summer.

-- Turn off lights in unused rooms.

-- Keep doors shut and close the blinds during summer days to keep out heat.

Create your own pool of electric customers. Customers can opt out of their existing electricity provider, create their own pool of customers and have electric generating companies bid to provide the pool with electricity. Remember that the pool has to be large enough to make it worth a company's effort and, depending on the price of electricity at the time of the bid, rates could be higher or lower than existing prices.

Consider living in an area that relies on municipal- or cooperative-distributed electricity. Do your homework first, however. While some of these areas have lower electricity rates, not all do.

Sources: Pennsylvania Public Utility Commission and energy experts.

christina.gostomski@mcall.com

717-787-2067

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